Personal Finance Blog by Debit versus Credit

The Bailout of Fannie and Freddie

September 9, 2008 | Filed in: Miscellaneous | 1 comment

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The United States of America has officially become a nation of bailouts.  With the government takeover of Fannie Mae and Freddie Mac on Sunday, September 7 they have also become the nation’s largest mortgage provider.  They now own (or back) around $5-6 trillion in mortgage loans, which is roughtly half of the existing mortgages in the U.S.  What does this mean for the taxpayer?  For the homeowner?  For the investor?  For the financial markets as a whole?

Expect To Pay More In Taxes

Fannie Mae and Freddie Mac are HUGE companies.  They alone service over half of the mortgages in the U.S.  They have trillions of dollars worth of liabilities as well.  In fact according to the former president of the Federal Reserve Bank of St. Louis, William Poole, they have up to $6 trillion dollars in liabilities (as reported by the Wall Street Journal Online).  He believes that it would not be unreasonable to assume that they may end up taking a loss on as much as 5% of their loan portfolio which would provide taxpayers a burden of some $300 billion dollars.  While this would more than likely just be added to the national debt of almost $10 trillion dollars it would eventually have to be paid off and those who are ultimately responsible for this debt are the taxpayers.  You, me and your neighbor.

Mortgage Rates May Finally Drop

The rising level of defaults on mortgages over the past year or two has forced Fannie and Freddie to get more defensive and stop buying up so many mortgages.  This has led to an increased risk for mortgage originators, as they might not be able to sell off their risky loans.  It has also decreased the amount of cash flowing through the mortgage market and as such has had a strong effect on mortgage rates.  Because of the increased risk and the limited capital mortgage lenders have been forced to raise mortgage rates and keep them high.  Now that the U.S. has virtually guaranteed the success and liquidity of Fannie and Freddie mortgage originators are likely to have a less difficult time securing cash and selling off their loans.  This should lead to a drop in mortgage rates over the next six months or so.

Start Investing Now If You Haven’t Already

The markets rebounded on Monday with the Dow Jones Industrial Average ending up almost 300 points (or 2.59%).  Investors are excited about the future now that they don’t have to worry about Fannie and Freddie.  If the Treasury Department and Paulson are right (and I personally doubt they are) then this bailout should fix everything.  After all the housing market is the primary cause of the “recession” that we are currently facing.  By shoring up the two largest mortgage companies and providing much-needed capital to the mortgage industry they’re hoping to end this downturn once and for all.  Things aren’t quite that black and white however but we’ll come back to that in the next section.  In the meantime for the purposes of investing they (the feds) may be right about one thing.  By taking over Fannie and Freddie they should increase investor confidence and lower mortgage rates.  This should have the effect of a declining bear market if not the return to a bear market.

The Financial System Is Nowhere Near A Full Recovery

It is true that the primary cause of the economic turmoil that the U.S. is currently facing is due to the uncertainty in the mortgage markets.  It’s also true that the decreased cash flowing into these markets due to Fannie and Freddie’s cutbacks was having a negative affect on the entire market.  However one would have to be nieve to assume that by taking over Fannie and Freddie and providing capital to the mortgage markets that this mess will clean up quickly.  The fact is that homeowners are not walking away from their houses because their mortgage lender was unable to sell their mortgage to Fannie - they are walking away because they are upside down on their house by a lot of money and they are unable to afford the payments.  Losses will continue to come.  The process may be slowed down and stopped sooner than it might have without this bailout (due to the increased affordability of purchasing a home) but unfortunately home values have not reached their lows, as most would-be homeowners are not ready to jump into the market even with today’s home prices!

The fact is that homes are STILL unaffordable in many markets across the U.S.  Homeowners are losing money and are bailing ship which is slowly decreasing home prices but there is probably quite a ways to go still before the buyers start to line up.  Bailout out Fannie and Freddie may help some, but as I stated already, the financial system is nowhere near a full recovery.

Technorati Tags: Fannie Mae, Freddie Mac, mortgage news, stock market, investing, taxes

Tags: Economy, Fannie Mae, Freddie Mac, housing bust, housing market, Rants, Real Estate

Let’s Talk About The Late Countrywide

July 24, 2008 | Filed in: Miscellaneous | No comment

If you own a home, pay attention to any of the business and financial news or have ever owned a home you probably know who Countrywide is.  They are of course “America’s number one home loan lender and no one can do what Countrywide can.”  Well Countrywide is no more as they’ve been purchased by Bank of America.  It’s the end of an era.  An era defined by the run-up in house prices and subsequently the decline of the U.S. housing market.  There are a million reasons why Countrywide might be to blame for some of this housing crisis we’re facing and probably a million more why they are not at fault.  The fact of the matter is that we are in a recession (so to speak) and that housing is the primary cause of said recession.  So what’s Countrywide have to do with it?

Charged With Lying To The People

Countrywide (and now BofA by extension) is essentially being blamed for lying to the people and being unethical in their lending practices.  Here are a few of the arguments against them, according to a recently filed lawsuit by California Attorney General Jerry Brown

• Beginning in 2004 company executives loosened and possibly ignored lending standards and flattered home buyers into thinking that they could afford more house by offering low teaser rates not clearly defined.
• Applied intense sales pressure for underwriters to process “60 to 70 loans per day” which made it all but impossible for them to take into consideration the borrowers ability to repay the loan.
• Loan officers frequently overstated how much borrowers earned or “led the borrower into overstating is or her income without explaining the risk of default with a loan he or she could not actually afford.”

It’s obvious there were some shady practices going on at Countrywide over the last several years.  The real question is how much has it really hurt the market?  Do you have a Countrywide loan?  I want to hear from anyone who has one and especially any one who has been hurt by an adjustable rate loan sponsored by Countrywide.

Tags: countrywide, housing bust, housing market

The Housing Crisis is Not Over

June 2, 2008 | Filed in: Personal Finance | No comment

I came across an interesting article the other day on the Wall Street Journal Online. Cyril Moulle-Berteaux of Traxis Partners LP (a hedge fund based in New York) wrote an article entitled “The Housing Crisis is Over.” He brought up some very interesting points, which I’d like to highlight for you and also provide some commentary as well as my own personal opinion on the points that he’s made.

Mr. Moulle-Berteaux begins his article by mentioning that headlines in the financial as well as the popular press are intensifying. Yet even with all of these cries of doom and gloom he predicts that “April 2008 will mark the bottom of the U.S. housing market.” This article, although posted almost a month ago, caught my eye because of the significance of this statement. What would Mr. Moulle-Berteaux use to back up this statement? How could he possibly claim that we’re at the bottom and won’t go down any more when it seems so obvious that this is quite untrue? Isn’t it?

What the “Bottom” Means

The author reminds us that “a bottom does not mean that prices are about to return to the heady days of 2005. It just means that the trend is no longer getting worse, which is the critical factor.” All things considered this makes his profound statement seem less impossible and even somewhat likely. After all we have been in this housing bust for several years now, shouldn’t it be about time for us to be at the bottom of the bust? It is definitely a possibility, but is it an actuality?

Mr. Moulle-Berteaux’s Argument

The author argued that the same thing that caused this bust is likely to pull us out of it: affordability. According to him during the 90’s and early 2000’s it took 19% of average monthly income to “service a conforming mortgage on the average home purchased.”  For first time buyers he claims that it took 29% of monthly income to purchase a home.  These numbers jumped for non-first-time home buyers and first-time buyers, respectively, to 25% and 37% of monthly income by the year 2006.  Over the past two years (since the previous mentioned point in 2006) Moulle-Berteaux argues that home prices have fallen 10-15% and mortgage rates have come down 70 basis points from their high (a basis point is equal to 1/100th of a percent).  This reduction in home prices has brought the monthly income/mortgage payment ratio back in line at 19% of monthly income for the average home buyer and 31% for the first-time home buyer.  In other words, he claims, “homes on average are back to being as affordable as during the best of times in the 1990s.”  

Essentially Moulle-Bertreaux is arguing that although inventories are at their highest levels ever and that home values are dropping like flies, we have reached a bottom.  He claims that inventories are increasing, but at decreasingly smaller levels and that prices - although they will continue to drop until sometime in 2009 - will not drop at the level that they have heretofore been dropping at.  It’s an interesting argument, and it does make sense but does not seem to be the reality of the situation - at least not yet.

The Market in My Neighborhood

I did a little bit of research for the median home price in Phoenix, AZ as well as the median and average household incomes.  I then used these figures to calculate a percentage of an average mortgage payment (based on a rate of 6.31% APY and the median home price of $210,000 with no down payment) and the 2006 greater-Phoenix median household income of $51,862 dollars.  With these figures I calculated that the average home buyer (based on their income equaling the median income) in the Phoenix area buying a home that’s valued at the median price would have a mortgage payment to monthly income ratio of 38% which is well above the authors claimed percentages of 19% and 31% for the average home buyer and the first-time buyer.

The market in my neighborhood is - based on the authors facts and figures - far above the affordability index that he has created.  So for the Phoenix area at least it seems that the housing crisis is not over… not yet.

How is the market in your neck of the woods?  Does it fall in line with these “averages” that Mr. Moulle-Berteaux has stated?

Tags: affordability, boom and bust, housing, housing bust, housing market, Personal Finance, Real Estate